Dear Matt: Two employees in my department who made about $100,000 combined left the company, leaving me more work and more responsibilities, yet during my annual review I only received a 3 percent raise. If they could pay them well, why can't the company add $5,000-$10,000 to my salary?
Matt says: It seems like an easy solution, right? Those employees are now gone, so they aren't spending that money on them. You do a good job, work hard, why not give you an extra $5,000, or even $10,000? The company is still ahead $90,000 from those employees leaving, right? Unfortunately, it's not as easy as it seems.
"In today's economic environment many companies are doing more with less," says Elaine Buddington, a Twin Cities HR professional who has developed and managed compensation and total rewards programs for small and large corporations. "As company costs for providing benefits, especially health insurance, continue to rise, money that previously was used to fund larger merit increase budgets may have to be diverted to continue to fund those other programs."
So while it seems there is suddenly more money to go around, that is not entirely accurate. That salary may be diverted to fill another open position that was previously on hold. It may be reinvested in employee training, or perhaps equipment upgrades. Every company has different needs that reach far beyond salary.
Buddington broke down how pay increases work in a company where increases are primarily based on performance — the traditional merit system approach.
These companies typically have a formal salary increase budget each year. They also have something that resembles a bell-shaped curve for performance ratings. They may reserve 20 percent of that budget for the top performers, 70 percent for the middle performers and 10 percent for the employees who need improvement. Then there is a merit increase grid where the actual increase is determined by the person's performance rating, with the goal to ensure the highest increases go to the top performers. After all the increases are determined, the total amount given to all employees should equal the amount of the budget that was set at the beginning of the year.
"Every company has a different system set up for pay raises," says Buddington, who adds that while a 3 percent increase may seem minimal, it's important to look at the big picture.
"Some companies are starting to reserve salary increases for only their very top performers, or highest potential performers, while the remaining masses receive no increases," she says. "We are also coming out of an era where there were no increases at all, or worse yet, employees were taking pay cuts across the board."
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